Want to calculate the returns on your investments? There are many financial tools available online to help you compute earnings. The SIP calculator is one of them. Before delving into how the calculator works, it helps to understand what exactly does SIP mean.

A systematic investment plan or SIP allows you to make regular investments in a mutual fund scheme rather than through the lump sum route. This method helps you stay disciplined in your investments. You can invest monthly, quarterly or half-yearly through the SIP route.

The advantage of the SIP route is that you can start with an investment that’s low, as low as Rs 500, which makes it affordable and easy for the salaried class. You can increase your investment any time you want.

What are the advantages of a SIP?

Rupee-cost averaging:

Apart from the aforementioned benefit of bringing in disciplined investments, SIPs help you make use of rupee-cost averaging.

When you invest a certain amount regularly, the costs get averaged because when the market is down, you end up getting more units while when the market is high, you will receive fewer units. This is called rupee cost averaging. By investing in a mutual fund through SIP,  your investment experiences both the highs and lows of the market, therefore averaging out over a sustained investment horizon.

The power of compounding:

Compounding happens when the interest that you have earned on your investment also receives returns in the next year. Compounding works well over a longer term and this means disciplined and sustained investment, even if it is a small amount.

What is a SIP investment calculator?

  • A SIP return calculator or an investment calculator helps you estimate your returns on the mutual fund investments you have made through the systematic investment plan route. It is a free tool available online that is algorithmic.
  • It gives you an estimate of how much you should invest if you wish to see a certain amount of returns. This way, you can plan your investment in such a manner that you meet your goals during a specific timeframe.
  • It also helps you choose a mutual fund scheme that’s aligned with your goals.
  • A SIP calculator comes in handy when you have invested a certain but want to increase or decrease it later and need to know the new earnings you are likely to generate thanks to the change.

How does a SIP return calculator work?

You would need to input fields such as monthly investment, number of years and the expected return rate for you to get an estimate of how much earnings you can generate. A SIP return calculator works on the compounding formula: FV = P * ((1+i)n – 1)/i) x (1+ i) where FV is the future value, P is the amount invested at the beginning of each payment period, n is the number of payments to be made, i is the rate of interest that is compounded.

If you were to take into account the monthly SIP, it will be compounded as i/12. So, if you wish to invest 10,000 each month for a year at a rate of interest of 10 per cent for 24 months, your monthly rate of returns will be 10 per cent/12 which is 0.008. By applying the formula, you get a future value is 10000 x ((1+1/120)12 – 1)/1/120 x (1 + 1/120). The value towards the end of the tenure will add up to Rs 13.2 lakh.

No need to remember formula, use SIP calculator instead

This looks too long-winded a formula and consumes a lot of time if you were to put it into use. You would also need to remember it or keep referring to it when you make calculations.  All this number crunching will be a drain on your time and energy. It is instead easy to use a SIP investment calculator where all you have to do is input the different numbers to get a number that is your future value of earnings.

It is fast and convenient, and you can seamlessly input numbers, delete/alter the number you have typed in and use the SIP calculator as many times as you want.  If you have a specific amount in mind to buy that dream home or send your child abroad for higher studies, and the future earnings show a lower amount, you could look at rearranging your investment to reach the goal.

Financial planning and calculators

Staying financially planned is a very important aspect as you reach different life stages. When you make a financial plan, you take into account several factors such as your income, cash flow, family commitments, goals, your current standard of living and investment options. A comprehensive financial plan helps you assess your risk tolerance and helps you make the right investment choice. The SIP route to mutual funds ensures that your financial plan is intact, as you make disciplined investments and stay on track. A SIP calculator is a good financial tool to have while you chart out your financial and investment plans.

In conclusion

A SIP return calculator is an online financial tool with an easy-to-use interface that helps you calculate your future earnings. All you would need to do is key in your investment amount per month, the tenure in years, the rate of returns, and the online tool will display your answer. With the help of the SIP investment calculator, you can easily compute and alter your investment amounts instead of using a complex formula to calculate it. An online tool is ideal for anyone who is busy and wants to make quick calculations pertaining to their investment choices.